Seth Klarman Downside-First Model

Seth Klarman model inputs

Score each input from 0 to 100, multiply by the weight, then read the total with the score band table.

Seth Klarman score bands

Use the score as a research gate, not as a price target or recommendation.

Seth Klarman action matrix

The action matrix converts model conditions into the next research step.

Investor Checklist

• Downside map (25%): Liquidation value, cash burn, dilution, refinancing, covenant risk.
• Discount source (20%): Forced selling, fear, complexity, leverage, or real business impairment.
• Liquidity and horizon (15%): Can the investor wait without being forced out.
• Catalyst quality (15%): Asset sale, restructuring, estimate reset, filing signal, or management action.
• Position-size safety (15%): Sizing from downside loss, not upside target.
• Opportunity cost (10%): Whether cash or a cleaner setup is better.

The Model

Klarman Downside-First Score: Score = 25% downside map + 20% discount source + 15% liquidity/time horizon + 15% catalyst quality + 15% position-size safety + 10% opportunity cost.

• Downside map (25%) — Liquidation value, cash burn, dilution, refinancing, covenant risk.
• Discount source (20%) — Forced selling, fear, complexity, leverage, or real business impairment.
• Liquidity and horizon (15%) — Can the investor wait without being forced out.
• Catalyst quality (15%) — Asset sale, restructuring, estimate reset, filing signal, or management action.
• Position-size safety (15%) — Sizing from downside loss, not upside target.
• Opportunity cost (10%) — Whether cash or a cleaner setup is better.

Scorecard and action tables

Use the tables above as the working model. Fill each input with current evidence, assign a rough score, then let the action matrix decide whether the page deserves deeper research.

• Large discount + survivable downside: Research — Write the bear case before estimating upside.
• Large discount + financing risk: Avoid or tiny size — Refinancing can destroy the thesis.
• Complex situation + no catalyst: Wait — Dead money is a real cost.
• Unclear downside: Reject — If the loss cannot be mapped, the model cannot pass.

How To Read The Score

The score is not a price target. It is a research gate. High scores mean the setup deserves deeper work; low scores mean the model is warning that the thesis is incomplete.

• 80-100: Mispriced uncertainty — Discount is real and downside is survivable.
• 65-79: Small position only — Potential opportunity, but one risk deserves smaller sizing.
• 45-64: Cheap for a reason — Discount may reflect real impairment.
• 0-44: Avoid — Complexity or leverage can permanently impair capital.

Hard Invalidation Rules

These rules override the score. If one hard invalidation appears, the model should be re-scored before any position decision.

• The company needs dilutive financing before the thesis can play out.
• The discount source is permanent impairment, not temporary fear.
• Liquidity dries up or the investor cannot hold through volatility.
• The catalyst is delayed while cash burn continues.

Example Model Run

A stock down 55% after a guidance cut may still score 47 if debt matures soon and free cash flow is negative. The model says cheap for a reason.

SnowballHare Data Workflow

Run the model with SnowballHare pages as evidence sources. The goal is to make each score traceable, not subjective.

• Use 13F investor pages to review how value managers handle concentrated or unpopular positions.
• Use investor questions to check risk-reward, position sizing, stop-loss, and drawdown topics.
• Use earnings analysis to separate temporary disappointment from permanent impairment.
• Use forecasts to make bear-case assumptions explicit before considering upside.

Model Traps

The model becomes dangerous when one input is treated as the whole answer.

• Calling a stock cheap without identifying why the market is selling it.
• Ignoring liquidity because the theoretical upside looks large.
• Sizing a position from upside instead of downside.
• Treating complexity as automatically attractive.

When To Use Another Model

It can be too conservative for clean secular growth or momentum-driven leadership. It may also pass on good businesses because the margin of safety is not obvious enough.

Related Topics

Common Questions